Tips on passing a family business on to the next generation

This article was first published in South West Business Insider magazine.

Family businesses are the backbone of our region’s economy. Culture and family values often give them an advantage over their non-family run competitors, yet only 5% of family-owned businesses in the UK make it to the fourth generation.

Are these just the lucky ones or have they found the key to managing succession from generation to generation effectively?

While there are many factors behind the longevity of successful family businesses, the transition from one generation to the next is often difficult and can lead to conflict and ultimately the failure of the business. To avoid these potential pitfalls, it is important to deal with succession early and in an open and inclusive manner.

Take time to plan

Succession planning is a long-term process and should happen well before the current generation of owner-managers plan to step down. We recommend starting this process five to seven years before the transition happens, not least because successors need time to gain the necessary skills to run the business before taking over the reins.

Tensions often arise if the transition between outgoing and incoming generations is not planned sufficiently and the process takes too long. This can make the next generation feel overshadowed and frustrated, but such a scenario can be avoided if the process is handled well.

If you are thinking about passing your business to the next generation, your succession plan needs to strike the right balance between the family, the business and you. Answering some basic questions will help formulate a written succession plan. This enables family members and non-family management to know where they stand and the process and timescales that will ensue.

Key questions

Questions to consider at an early stage include:

• Does the next generation have the skills to run the business?
• How do you choose which sibling should be the managing director?
• Do your children want the job or do they feel obliged to follow in your footsteps?
• Is appointing a non-family member to run the business a realistic option?
• Are you ready to relinquish control of the business you have spent your working life running?
• Are you financially secure enough to step away from the business without receiving value for your shares?

Be open-minded to seeking outside advice. Family businesses can at times be too insular and a trusted adviser can help to facilitate fresh ideas and creative thinking, including when it comes to extracting value for an owner’s shares. Outside facilitators can also help to make the working relationships of family members more productive.

The reality of succession planning is that it is a hard and often frustrating and emotional journey, but with good planning and a clear vision of the skills the succeeding generation need to run the business, there is certainly a way forward.

Find out more about our family business services.